Goldman Sachs (GS) Group Inc. said it is under scrutiny in probes related to high-frequency trading and whether its hiring practices comply US antibribery laws. This is the first time the firm has publicly disclosed both investigations. The information was made available via Goldman’s quarterly filing with the SEC.
In the bank hiring practices investigation, Credit Suisse Group Ag (CS), Morgan Stanley (MS), UBS AG (UBS), and Citigroup (C) are also under scrutiny. The Securities and Exchange Commission wants to know whether the banks or their staff hired the relatives of well-connected officials in Asia, which could be a violation of the antibribery laws—in particular, the Foreign Corrupt Practices Act, which prevents companies from giving foreign officials items of value in exchange for business. Although it isn’t illegal to hire government officials’ relatives in Asia, hires cannot just be made for the purpose of earning new business.
As for the high-speed trading probe, the US Justice Department, the SEC, New York Attorney General Eric Schneiderman, and the Federal Bureau of Investigation are assessing trades that engage in fast algorithmic trading. Schneiderman wants to know if firms involved in high-speed trading have secret deals with trading venues, such as dark pools and stock exchanges, that lets them trade before other investors.
Goldman has Sigma X, which is a dark pool trading operation. Recently, the firm has been weighing whether to shut it down amidst the growing criticism over this kind of private stock-trading venue. (In 2011, Sigma X experienced a pricing malfunction and customers were not paid correctly for transactions. Goldman reimbursed them the losses.)
In dark pools, investors get to be more anonymous than in public markets. Recent technological glitches in the stock market, however, have emphasized the risks involved in running private trading platforms. The Financial Industry Authority is also looking at the way brokers use dark pools to make trades and route customer orders.
Goldman is currently a defendant in a class action securities case over high-speed trading. The Rhode Island capital of Providence proposed the lawsuit for investors who bought stock in the US between 2009 and now.
Goldman and the other defendants, JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Morgan Stanley (MS), and Citigroup Inc. (C) , are accused of working with stock exchanges run by NASDAQ OMX Group Inc., BATS Global Markets Inc., Chicago Board Options Exchange, and Intercontinental Exchange's New York Stock Exchange to manipulate the markets while engaging in fraud. As a result, contends the high-frequency trading lawsuit, every year, billions of dollars were diverted from the sellers of securities and its buyers.
The securities complaint says that brokerages and stock exchanges got kickbacks for giving high-frequency trading firms access to material trading information. Other allegations include rebate arbitrage, electronic front-running, contemporaneous trading, and spoofing.
Exchanges, brokerages hit with high-speed trading class action, Reuters, April 18, 2014
Goldman Mulls Closing Dark Pool, The Wall Street Journal, April 8, 2014
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FINRA NEWS: Goldman Sachs Appeals Vacating of Securities Award, Non-Customers of Brokerage Firm Can’t Compel Arbitration, & Three Governors Named To FINRA Board, Stockbroker Fraud Blog, August 21, 2013
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Goldman Sachs Must Contend with Proposed Class-Action CDO Lawsuit, Institutional Investor Securities Blog, January 22, 2014